ICA16/237-I Tesco: Every Little Helps (*) A proper car and a thousand pounds a year! In 1959, it was the limit of my ambition, though when I told my mother that I had accepted Jack’s offer she couldn’t disguise her horror: ‘I haven’t spent all this money on your education for you to join a company like that.’ The charge was loaded with contempt, but her reaction was typical of the times. As late as the 1950s there was still a deep-rooted prejudice among families like mine against anyone entering the ‘trade’ - the word itself carried its own stigma. There were the usual acceptable occupations for a public schoolboy like myself, but as for retailing, tradesmen were still very much at the back door of life. I’ve always felt that the damage that such snobbery has inflicted, not only on our social attitudes but also on our economic performance, has been incalculable - but then, my mother has never been tempted by a thousand pounds a year and a car! Tiger by the Tail, by Lord (Ian) MacLaurin, former Chairman of Tesco Tesco history Tesco originated in 1919 when Sir Jack Cohen used his gratuity from his Army service in the First World War to sell groceries from a market stall in the East End of London. By the late 1920s, Tesco (or TES from TE Stockell, a tea supplier that he used, and CO from Cohen) was selling from open- fronted shops in London high streets, the first store being at Burnt Oak, Edgware. Cohen’s motto was, “Pile it high, sell it cheap,” referring to the idea that customers wanted inexpensive products at convenient locations and that volume would drive profitability. Sir Jack concentrated on growing the business; vigorously pursuing expansion. By the start of the Second World War, there were 100 Tesco stores in open competition with the earlier established Sainsbury’s and in 1947, Tesco Stores (Holdings) Ltd was floated on the London Stock Exchange with a share price of 25 pence.1 2 During the Great Depression of the 1930s, Michael J. Cullen opened the first self- service supermarket (King Kullen) in Queens, New York. Sir Jack, realizing that the (*) Written by Peter Louis from public sources, under the supervision of Professor Enrique Dans from Instituto de Empresa. Original version as of April 07, 2002 Published by the Department of Research, Instituto de Empresa. María de Molina 13. 28006 MADRID, Spain. No total or partial reproduction is allowed without permission. 1 Business History, www.tesco.com 2 Sainsbury’s was established in 1869 by John James and Mary Ann Sainsbury, www.jsainsbury.com INSTITUTO DE EMPRESA -2- ICA16/237-I self-service model offered the possibility to lower prices by offering a wider variety and larger volume of stock with fewer employees, introduced his first self-service grocery store in St. Albans in 1948. In 1956, Sir Jack opened his first self-service supermarket in Maldon. By 1960s, the self-service model helped to establish Tesco’s reputation as a value-for-money retailer of groceries. Nevertheless, up until 1964, Resale Price Maintenance (RPM)3 restricted by how much retailers could discount their goods. Specifically, it allowed suppliers to suggest the minimum price at which retailers could sell their products. This prevented Tesco from transmitting the full effect of their lower cost bulk-purchases to their customers in the form of further price reductions.4 While Sir Jack lobbied Parliament to abolish RPM, Tesco introduced Green-Shield trading stamps as a means to effectively lower its prices. Customers collected stamps on their purchases of groceries and other items. These stamps were then used to fill a book, which could be exchanged for cash or gifts. The trading stamps proved to be a great hit with Tesco customers and helped Tesco to capture trade from its fierce competitors, but at a price: the Green-Shield scheme cost Tesco £12 million annually. Sainsbury’s led the protests against the trading stamps as price-cutting by the back door. The then Lord Sainsbury, petitioned Parliament to pass the Trading Stamps Bill aimed at prohibiting the use of trading stamps. Parliament duly agreed and passed the Trading Stamp Act 1964. However, this did not signal the end of Green Shield or Jack Cohen. In fact, other retailers felt compelled to follow Tesco with their own trading stamps scheme.5, 6 The move upmarket By the 1970s, the Tesco brand began to look a bit jaded. Customers had more disposable income and their tastes now included more expensive luxury items as well as the usual Tesco favorites. Moreover, Tesco stores seemed old and a bit dilapidated, and they were progressively losing market share to both national chains, such as Sainsbury’s, and the newer regional merchandisers, such as Safeway, ASDA and Iceland. In the late 1970s, Tesco decided to concentrate on the larger out-of-town superstore format whilst simultaneously closing as many as 500 of the older high street stores.7 The superstores offered a wider range of goods in a more spacious and lighted environment (with filing stations and car parking at major stores) where Tesco could emphasize customer service in a customer friendly environment.8 Lord MacLaurin, then managing director, commissioned a market research study to determine exactly what the customer wanted. Among other things, the results showed that customers were not interested in promotional offers and that they were targeting the wrong customer profiles. In 1977, Tesco finally abandoned the Green Shields 3 RPM aimed to protect the smaller retailer from the harmful effects of price competition with their larger bulk- purchasing competitors. However, suppliers subsequently misused this provision to maintain unreasonably high prices. 4 Business History, www.tesco.com 5 Ibid 6 Customer Loyalty – Pile it High and Prosper, Pharmaceutical Times, September 2001, www.inpharm.com 7 D. C. Ranatunga, Lose touch with the customer and you will perish – former Tesco Chief, The Sunday Times (Sri Lanka), 1 April 2001, www.is.lk/times 8 Business History, www.tesco.com INSTITUTO DE EMPRESA -3- ICA16/237-I stamps trading scheme and rolled out Operation Checkout, an aggressive price-cutting strategy. The price cuts reduced profit margins but market share increased significantly from 7% to 12 per cent. Under the direction of Terry Leahy, Tesco increased the number of lines in its own Value range brand to appeal to the price-sensitive shopper.9 Additionally, Tesco started a benchmarking strategy, looking at what other retailers were doing well. Marks & Spencer was, at that time, the leading UK retailer and had many schemes that were popular among their customers. “We just copied what they did unashamedly,” Lord MacLaurin said. “Don’t feel shy to copy if you see something good even it is from your competitors.” Tesco computerized its checkout systems, invested heavily in staff training and initiated focused advertising campaigns to highlight the changes within the stores. Moreover, Tesco directors visited stores to hear the views of both customers and staff and Customer Panels were set up to help keep Tesco in “lock step” with their customers.10 In 1985, Lord MacLaurin became Chairman of Tesco. In the same year, Tesco opened its 100th superstore. Two years later, Tesco announced a plan to build a further 29. By 1992, Tesco was already the UK’s largest independent petrol retailer, with Tesco returning to the British high street with its Tesco Metro store concept for city workers, high street shoppers and the local community, and then the Tesco Express model, which combined the convenience store format with petrol retailing, specifically for the local urban community. Tesco even opened a large format hypermarket in Kensington, central London, which included low-cost housing as part of the development.11 12 Furthermore, expansion occurred north of the border, in Scotland, with Tesco beating Sainsbury’s to acquire the William Low chain.13 Within stores, some of Tesco’s innovations included: the One in Front queuing standard to reduce waiting times, a National Lottery counter, baby-changing and bottle-warming facilities in all new stores, ATMs, in-store pharmacy and escorted item searches. Nevertheless, Tesco was still the UK’s second favorite grocer after Sainsbury’s, and the market share divide between the two remained as constant as ever. 9 Tesco: East End to East Asia, 10 April 2001, news.bbc.co.uk 10 D C Ranatunga, Lose touch with the customer and you will perish – former Tesco Chief, The Sunday Times (Sri Lanka), 1 April 2001, www.is.lk/times 11Tesco: East End to East Asia, 10 April 2001, news.bbc.co.uk 12 Business History, www.tesco.com 13 A tale of two supermarkets, Business: The Company File, 12 April 1999, news.bbc.co.uk INSTITUTO DE EMPRESA -4- ICA16/237-I The Clubcard “Customer loyalty is not about how customers demonstrate their loyalty to us, it is about how we demonstrate our loyalty to them.” 14 Lord MacLaurin, Chairman of Tesco The Tesco Clubcard was the UK’s first supermarket loyalty program. Tesco first piloted the scheme in twelve stores before rolling it out nationally in February 1995 (see Exhibit 1: The Tesco Clubcard). Tesco introduced the Clubcard as a means of giving something back to the customer – especially the customer who shopped frequently and purchased more as points accumulated for every £5 that he or she spent after a minimum spend of £10. The points were converted quarterly into Clubcard vouchers, which then could be redeemed in any Tesco store.15 To support the launch, Tesco sent out one hundred and forty thousand educational videos to staff on the checkouts to explain just how the loyalty scheme worked and how it benefited the customer, Tesco and the employee.16 The consensus in the British media was that Tesco was taking a nostalgic step backwards.